Quality Metal Service Center Essay

The disclose issue in the case is that the incentive compensation system does not motivate district managers to make decisions which are consistent with the strategy of timbre Metal Service Center (QMSC) because it is tied to the districts target ROA. Acquiring the new process equipment reduces the incentive bonus of the Columbus district Manager, Mr. Ken Richards, from 11.1% to 4.28% of his musical theme salary. This happens because the asset base increases with the new equipment and will turn over the target for 1992. This may motivate him to not proceed with the purchase even up if the proposal of the Sales Manager, Ms. Elizabeth Barret, maneuvers that the acquisition results to a positive NPV and thus, should be displace to the home space for approval.To solve the issue, QMSC should use EVA instead of ROA as the round of district and manager performance. Since EVA is the best proxy for shareholder survey at the business unit level, improving EVA will also improve the social clubs overall performance. The managers district objectives will then be harmonious with the participations overall objectives. This will induce Mr. Richards to employ spare assets which will promote the growth of both the Columbus district and QMSC, such as the one in Ms. Barrets proposal. The purchase of the new processing equipment is also in line with the companys objective to unfold techniques and marketing program that would increase market share in determine industries and geographic markets of specialty metal users. Having the equipment will allow QMSC to provide the hold for processed metals in the Columbus District with a short school principal time, addressing the concern of potential customers.Another aspect of the issue that needs to be looked into is the decision on what assets should be included in the investment base and what expenses should be charged from profits. QMSC includes land, warehouse buildings, and equipment at gross book value in its inve stment base. This results to an EVA that signals a decrease in profitability during the aboriginal years of the assets when in fact, profits increased. It will be better for the company to use annuity depreciation so that the profitability calculations will show the correct EVA. Leased buildings and equipment are also part of the asset base. This motivates managers to admit rather own assets whenever the interest charge that is built into the rental follow is less than the capitalcharge that is applied to the investment base.Thus, the head office must think carefully before approving the leases of the districts as the managers ability just be using it to window dress their performance. QMSC also includes stock and accounts receivables, without subtracting standard accounts payable, using average values for the period. This is a good blueprint because these are representative of the assets used during the period and thus, conceptually a cheering measure of the amount that shou ld be related to profits. On the other hand, QMSCs computation for district profits is a fair approach because it alone considers expenses that can be controlled by the district managers.